NEW YORK -- Wells Fargo, the country's biggest mortgage lender, reported a 25 percent increase in fourth-quarter earnings Friday, beating analysts' expectations for both profit and revenue. The bank made more loans, set aside less money for potential defaults and enjoyed above-average returns from the investments made by its private equity business.
The San Francisco-based bank was the first major lender to report fourth-quarter earnings. The bank increased its business in credit cards, wealth management and other units, and charged more in fees. Earnings and revenue also jumped for the full year, and bank officials described the results as "outstanding," especially in the face of a challenging economy.
Investors weren't impressed, however, and worried that the bank's mortgage business could be slowing. Wells Fargo's stock fell 44 cents to $34.96 in early trading.
In the third quarter, mortgage refinancing propelled Wells Fargo's profits higher, as customers clamored to take advantage of ultra-low mortgage rates. Rates are still low, but some investors wonder if the banks are running out of customers to refinance.
Wells Fargo said it funded $125 billion in mortgages for the fourth quarter, up from $120 billion in the same period a year ago. However, that was down from $139 billion in the third quarter. Mortgage applications were down over both for the year and the quarter.
The Federal Reserve has been keeping interest rates at historically low levels in an effort to encourage lending and boost the economy. However low interest rates can also hurt banks by reducing the income they get from lending, since they have to charge customers lower rates. Reflecting that pressure, Wells Fargo reported that its interest income fell 2 percent in the fourth quarter from the same period a year ago.
Any change in the mortgage business is especially important at Wells Fargo. And while some of its rivals, like Bank of America, have scaled back on mortgage lending, Wells Fargo has pushed forward. It is heavily dependent on the sector and now controls 30 percent of the U.S. market, according to the trade publication Inside Mortgage Finance. The next largest, JPMorgan Chase, is a distant second, with 10 percent.
The strategy has helped Wells Fargo cultivate a reputation as one of the strongest banks in the country, adding jobs when others are cutting, and beating out JPMorgan as the biggest bank by stock market value.
But there are weaknesses in the strategy. In mortgages, the amount of loans the bank doesn't expect to collect on fell, but the amount of troubled loans rose. Being the biggest mortgage lender also makes Wells Fargo a target for lawmakers, regulators and customers who blame risky mortgage lending for the global financial crisis.
Being the country's biggest mortgage lender also gives Wells Fargo a broad view of the housing market, and on that front the bank's CEO was optimistic. Speaking on a conference call with analysts and investors, John Stumpf said the housing market "began a steady rebound in 2012." And while some areas were slower than hoped, "there is no doubt that a corner was turned, which is a real positive for our economy, and for Wells Fargo."
The bank's fourth-quarter earnings announcement came in much the same way as the third quarter's did, just days after the bank got a black eye related to the mortgage business. On Monday, Wells Fargo and nine other banks agreed to pay a combined $8.5 billion to settle the government's allegations that they had wrongfully foreclosed on homeowners. In October, three days before third-quarter earnings, Wells Fargo found itself answering Justice Department accusations that it had misrepresented the quality of its mortgages. Wells Fargo denies the charges.
In some ways, the foreclosure settlement is a relief, because it removes one of the uncertainties overhanging the bank. It also means the bank no longer has to go through individual, independent reviews of its foreclosures. The bank said that hiring external consultants and extra staff for the foreclosure reviews had recently been costing it about $125 million a quarter.
But the settlement is also a reminder that more legal tangles and regulatory fines could be waiting for Wells Fargo and the rest of the banking industry.
For its part of the foreclosure settlement, Wells Fargo said it would pay $766 million in cash and commit an extra $1.2 billion to "foreclosure prevention actions," such as mortgage modifications. The settlement forced it to take a $644 million charge to fourth-quarter results.
Revenue rose 7 percent, to $21.9 billion, beating the $21.3 billion expected by analysts polled by FactSet. Wells Fargo earned $4.9 billion before paying dividends on preferred stock. That amounted to 91 cents per share, more than the 87 cents per share analysts were expecting. In the same period a year earlier the bank earned $3.9 billion, or 73 cents per share.
Wells Fargo is the first of the megabanks to report earnings this quarter, a distinction usually held by its rival, JPMorgan, and one that has given it the chance to set the tone for the rest of the industry.
In that arena, Wells had already been encroaching on JPMorgan's territory. Though once it was generally the last of the megabanks to report, it moved up earnings over the past two quarters to release them on the same day as JPMorgan.